Radico Khaitan-Oct06 2021 3R StockIdea

Stock Idea
Sector: Consumer Goods October 06, 2021
Radico Khaitan Ltd
Add some magic to your portfolio
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Stock Idea
Radico Khaitan Ltd
Add some magic to your portfolio
Powered by the Sharekhan 3R Research Philosophy Consumer Goods Sharekhan code: RADICO Initiating Coverage
3R MATRIX + = - Summary
We initiate coverage on Radico Khaitan Limited (RKL) with a Buy and PT of Rs. 1,250; Stock
Right Sector (RS) ü
trades at 30.9x/24.7x its FY2023/24E EPS, at a 50% discount to USL’s valuations. Better
earnings growth, higher FCF and strong return profile will reduce valuation gap.
Right Quality (RQ) ü
RKL has emerged as a branded IMFL player by launching premium liquor brands; Premiumisation
strategies have helped RKL become the volume growth leader with IMFL volumes outpacing
Right Valuation (RV) ü industry growth in the past 3-4 years.
Improving demographics, favourable state policies and rising preference for premium brands
+ Positive = Neutral - Negative would help RKL’s IMFL sales volumes post a CAGR of ~13% over FY2021-24, outpacing the
industry. OPM to improve to 19% by FY2024.
Reco/View RKL aims to turn net cash positive by FY2023 led by better working capital management and
profitability. In absence of major capex, higher cash generated will be used for potential higher
Reco: Buy dividend payouts to shareholders.
Radico Khaitan (RKL) has transformed itself into a leading Indian Made Foreign Liquor (IMFL) brand
CMP: Rs. 905 player from being just a distillery player with premiumisation at the core of its growth strategy.
Volumes of Prestige & Above (P&A) brands clocked a CAGR of 16% over FY2017-21 contributing 30%
Price Target: Rs. 1,250 to total IMFL sales volumes (that were 50% of sales value). This helped OPM improve by 430BPS to
17% in FY2021. The premiumisation strategy aided RKL to become volume growth leader with IMFL
volume growth beat industry growth in the past 3-4 years. Efficient working capital management and
Company details improved profitability would help, the company to generate high free cash flows (FCF) in the coming
years. With no major capex on books, the higher cash generated will be utilised for developing
Market cap: Rs. 12,090 cr more premium brands and potential higher payouts to shareholders. We expect RKL’s RoE/RoCE to
improve to 17.6%/22.9% in FY2024 from 15.1%/17.4% in FY2021.
52-week high/low: Rs. 964/391 Sustained focus on gaining market share: RKL has developed a strong portfolio of premium
brands, bridging the gap in the domestic liquor industry, which has helped it to improve market
NSE volume: share over the years. Its holds 7% market share. Two of its leading brands, Magic Moment Vodka
6.3 lakh
(No of shares) and the Morpheus brand hold a 60% and 56% market shares respectively, in the premium category.
It is focusing on improving its share in largest domestic liquor category - whiskey by investing
BSE code: 532497 behind new launches and launching 2-3 premium products in the coming years.
Premiumisation core of growth strategy; OPM to expand by 200 bps by FY2024: Premiumisation
NSE code: RADICO
is at the core of RKL’s growth strategy. Prestige & Above (P&A) brands’ contribution improved to
30% in volume terms (and 50% in value terms) in FY2021 from 26% in FY2017. OPM expanded by
Free float:
8.0 cr 430 bps to 16.9% over the same period. With P&A brands’ (OPM of 22-25%) sales volumes expected
(No of shares) to clock a CAGR of 18% over FY2021-24, OPM is expected to further improve by 200BPS to 19% by
FY2024 (with P&A brands’ contribution expected to further improve to 34% in FY2024).
Net cash positive with improved return ratios by FY2023: With an efficient working capital cycle
Shareholding (%) (reduced to 34 days from 61 days from FY2017) and an improvement in the profitability, the net
debt reduced by Rs. 750 crore over FY16-21 to Rs. 150 crore. RKL is expected to be net cash positive
Promoters 40.3 by FY2023. The company does not have any major capital expenditure plans going ahead and
a large part of cash generation will be utilised for improving growth prospects of core brands,
FII 20.6 developing new premium brands and potential higher dividend payouts. We expect RKL’s RoE/
RoCE to improve to 17.6%/22.9% in FY2024 from 15.1%/17.4% in FY2021.
DII 18.2
Our Call
Others 20.93 View: Initiate coverage with Buy assigning Price Target of Rs. 1,250: RKL will be one of the key
beneficiaries of improving Indian demographics, consumer preference to premium brands and
reviving liquor policies in various states. This along with deleverage balance sheet, the company
Price chart is well-poised to achieve strong revenue and earnings CAGR of 17% and 22% over FY2021-24. The
1000.0
stock is trading at 30.9x/24.7x its FY2023/24E EPS, which is at ~50% discount to United Spirits Ltd
(USL) valuations. Improved quality of earnings, higher free cash generation and a strong return
800.0 profile will reduce valuation gap in the coming years. We initiate coverage on the stock with a Buy
recommendation assigning price target of Rs. 1250 (valuing at 34x its FY2024E EPS).
600.0
Key risk
400.0 Any change in the liquor policies in key states/sustained increase in the excise rate on liquor would
act the sales volume and earnings growth of the company in the near to medium term.
200.0
Jun-21
Oct-20
Feb-21
Sep-21
Valuation (Consolidated) Rs cr
Particulars FY21 FY22E FY23E FY24E
Revenue 2,418 2,883 3,348 3,875
Price performance OPM (%) 16.9 17.1 18.0 18.9
Adjusted PAT 271 311 391 490
(%) 1m 3m 6m 12m
Adjusted EPS (Rs.) 20.8 23.3 29.3 36.7
Absolute 0.1 19.2 65.1 122.5 P/E (x) 43.6 38.9 30.9 24.7
P/B (x) 6.7 5.9 5.1 4.4
Relative to EV/EBIDTA (x) 29.7 24.2 19.8 16.0
-2.4 6.3 43.8 69.6
Sensex RoNW (%) 15.1 15.1 16.4 17.6
Sharekhan Research, Bloomberg RoCE (%) 17.4 18.5 20.7 22.9
Source: Company, Sharekhan estimates
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3R Research Philosophy
Executive Summary
3R Research Positioning Summary Valuation and return potential

Right Sector:
Improving demographics, shift to premium
• Discounted valuation : The stock trades at
30.9x/24.7x its FY23/24E EPS, which is at 50%
brands and favourable liquor policies would
discount to USL’s valuation.
help IMFL segment grow in double digits in
the coming years.
• Valuation gap to reduce: Improved earnings
Right Quality: growth potential, high FCF generation and a
RKL has transformed itself into a leading IMFL strong return profile will reduce valuation gap
manufacturing company with premiumisation in future.
at the core of its growth strategy.
Right Valuation:
The stock trades at 30.9x/24.7x its FY23/24E
EPS, which is at 50% discount to USL
valuation.
Catalysts
Long-term triggers
Earnings and Balance sheet highlights
• P&A brands’ sales volume currently stands at 6-7 • Strong financial track record: Premiumisation
million cases, which is just 18% of USL’s domestic P&A strategy aided the company to post industry
sales volumes. leading volume growth of 12% over FY17-21.
• RKL will expand its portfolio with sustained new Revenues and PAT grew at CAGR of 10% and 36%,
product addition in the premium segment. respectively over FY17-21 with OPM expanding by
• RKL has a 6% market share in the whiskey category, 430 bps to 17% over the same period.
which provides ample opportunity to grow in the
domestic market. • Efficient working capital management: RKL’s
Medium Term Triggers working capital cycle decreased to 34 days in
• P&A brands’ sales volumes are expected to grow by FY2021 from 61 days in FY17; cumulative FCF
18% over FY21-24; contribution is expected to go up stood at Rs. 1,370 crore over the same period. With
34% by FY24. strong cash flows, net debt declined by Rs. 750
• Premiumisation would help margins to further expand crore.
by 200 bps to 19% in FY24.
• Strong operating performance and reduction in • Return profile to improve: With strong earnings
interest cost will help earnings to grow at 22% over growth prospects and efficient working capital
FY21-24. management, the cash flows on books further
Key Risks: A sustained increase in the excise rate on liquor expected to improve. RoE and RoCE is expected
would affect RKL’s sales volumes and earnings growth in to improve to 17.6% and 22.9% in FY2024E from
the near to medium term. 15.1% and 17.4% in FY2021.
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Table of Contents Pages

Right Sector - why we like liquor industry ......................................................................................................... 1
Premium liquor product sales to beat industry growth ......................................................................... 1
Growth drivers for Indian liquor industry ................................................................................................... 2
Regulated structure ......................................................................................................................................... 4
Right Quality - why we like RKL ........................................................................................................................... 7

Strong product portfolio with premium touch ........................................................................................... 7
Volume growth leader for past 3-4 years ................................................................................................. 8
Focus on gaining market share .................................................................................................................... 8
Privilege & above brands contribution improved to 30% of sales volume ..................................... 9
Focus on increasing global footprint ......................................................................................................... 10
Revenues to grow at CAGR of 17% over FY2021-24 ............................................................................... 10
Inflation in the ENA prices would be mitigated by backward integration and premiumisation . 10
Increasing efficiencies through supply chain management ................................................................ 11
Premiumisation & efficient supply chain would help in margin improvement ................................ 11
Better profitability and lower interest cost would aid strong growth in the bottom-line .............. 11
Better working capital management and higher cash flows led to debt reduction ...................... 12
Limited capex will pave way for higher investment behind brands and better dividend payout... 12
Financials in charts ................................................................................................................................................... 13
Company overview .................................................................................................................................................... 14
Valuation - Discounted valuation and strong growth prospects with improving cash flows
makes it a good pick ............................................................................................................................................... 19
Sector Outlook – Liberal state policies and changing consumer preference to drive growth.... 19
Company Outlook – Premiumisation would lead to strong earnings growth ................................. 19
Valuation – Initiate coverage with Buy assigning a price target of Rs. 1,250 ............................... 19
Peer comparison .............................................................................................................................................. 20
Key financials .............................................................................................................................................................. 21

P/L account ........................................................................................................................................................ 21
Balance Sheet ................................................................................................................................................... 22
Cash Flow Statement ...................................................................................................................................... 22
Key Ratios ........................................................................................................................................................... 23
RKL snapshot .............................................................................................................................................................. 24

About company ................................................................................................................................................ 24
Investment argument ...................................................................................................................................... 24
Key risks .............................................................................................................................................................. 24
Key management personnel ......................................................................................................................... 24
Top 10 shareholders ........................................................................................................................................ 24
3R Philosophy definitions ....................................................................................................................................... 25
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Why we like liquor industry

Improving demographics, lower per capita consumption, shift to premium brands and favourable change
in liquor policies in some of the key states, provides huge scope for Indian Made Foreign Liquor (IMFL)
players to grow strongly in the coming years. Though the IMFL segment is expected to grow at ~6% over
CY2020-2024, the liquor companies with a portfolio of strong premium brands will outpace the industry in
the medium to long term due to increase in preference for premium brands.
Premium liquor product sales to beat industry growth
The Indian spirits industry has been clocking an over 12% CAGR since 2001 making it one of the fastest
growing markets in the world. A slowdown of economy in 2019 followed by COVID-19 virus outbreak in 2020
hit liquor consumption in India. However, demand for premium brands was relatively less impacted by the
industry slowdown. Consumers are having more disposable incomes which they can use to have a quality
experience at home. Therefore, premium brands are likely to show much more resilience and grow in the near
future. India has an incredibly large young demography, which presents many opportunities to firms in the
industry. Revenues from IMFL sales are expected to post a CAGR of 5.7%, while sales volumes are likely to
clock a 5.9% CAGR during CY2020-24. The vodka segment is expected to perform better during the same
period with volume growth of 5.6% and value growth of 11.0%.
CY2020-24 – Trend in revenues… …in line with that of sales volumes
3,500 380
356
3,053 360
3,000
340
320
2,500
mn cases
300
Rs. bn
2,162 284
280
2,000
260
1,500 240
220
1,000 200
2020 2024 2020 2024
Spirits sale value Spirits sale volume
Source: Industry, Sharekhan Research Source: Industry, Sharekhan Research
The Indian spirits industry is segmented into IMFL (Indian Made Foreign Liquor), IMIL (Indian Made Indian
Liquor), wine, beer and imported alcohol. Whiskey dominates the industry by a very wide margin. The IMFL
segment accounts for more than 70% of the market. Traditionally, brown spirits which include Whiskey, Brandy
and Dark Rum have been the major contributors towards overall IMFL sales volume together comprising of
96.4% of the total IMFL volumes and 93.4% of revenues in CY2020, while white spirits such as Vodka and Gin
account for 3.6% of the total IMFL volumes and 6.6% of the value in the same year. Each of these categories
are expected to grow at 5-8% CAGR during CY2020-24.
Category-wise volume growth… …and revenue growth

CAGR 100%
CAGR
100% 3.6 3.7
6.5% 6.1 7.9 % 6.6
90% 12.1 12.6 90% 7.7 8.4
6.9% 8.1%
80% 9.1 8.8
80% 4.9%
19.0 19.5
70% 6.5% 70%
60% 60%
50% 50%
5.4%
40% 40% 77.1 76.2
30% 65.3 5.4% 64.2 30%
20% 20%
10% 10%
0% 0%
2020 2024 2020 2024
Whiskey Brandy Rum White spirits Whiskey Brandy Rum White spirits
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Among white spirits, the vodka segment’s growth indicates a strong premiumisation trend with volume growth
of Super Premium and Premium Vodka higher that the overall volume growth coupled with an increase in
market share. This trend is expected to continue and the share of premium category vodka is anticipated to
increase further.
Premiumisation trend in vodka category Increased market share of Super-Premium and Premium Vodka
10.0
9.0 8.6
7.8
8.0
2020 68 32
7.0
6.0
6.0 5.6
5.1
% growth
5.0 4.1
4.0
3.0
2014 60 40
2.0
1.0
0.0
2014-2019 2021-2025 0% 20% 40% 60% 80% 100%
Overall Premium vodka Super Premium vodka Premium & Super Premium vodka Regular vodka
Growth drivers for Indian liquor industry
Favourable demographics: India has a young demographic profile and over 15 million people are expected
to enter the drinking age every year, which represents significant growth opportunities for the industry. Total
household consumption is expected to reach a size of Rs. 300 trillion by 2030. Further, with proportion of high-
income households getting widely distributed, the contribution from tier-2, -3 and -4 cities to the consumption
is likely to increase.
A wider drinking age population

100%
7 8 10
80%
58 63
60% 64
40%
20% 35 29 26
0%
2001 2011 2021E
0-14 years 15-59 years 60+ years
Source: Industry, Sharekhan Research
Urbanisation: India’s huge population is migrating towards bigger cities, where they are exposed to a wider
variety of alcoholic beverage products, including IMFL and thus they significantly contribute to market growth.
Rapid urbanisation is expected to enhance disposable income, which is favourable for the industry’s growth.
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Rising Urbanisation
40
34
35
29 30
30
25
20
%
15 11
10
5
0
C1901 C2001 C2011 C2017
Urbanisation (as per Census)
Growth in rural consumption: Rural consumption is expected to grow faster with growing incomes and greater
internet penetration. Even during COVID-19, the rural economy has shown more resilience over the last year
due to a better crop season and ongoing policy support.
Low per capita consumption: India remains one of the most under-penetrated markets, indicating ample
scope to grow further. It is expected that per capita consumption will increase with changes in lifestyle and
aspirations of the population.
Per capita (15+ years) alcohol consumption (2014)

12
10.7
10.1
10 8.8
8 7.3
6.4
bulk litre
4 3.1
0
UK Russia USA Brazil Thailand India
Changing consumer preferences towards premiumisation: Rising affluence is the biggest driver of
increasing consumption. With more Indians traveling abroad, rising aspirations, favourable environment for
imported liquor and higher disposable income, consumers are upgrading towards premium liquor segments.
Additionally, consumer behaviour and spending patterns are shifting as disposable incomes rise and Indian
society evolves with a preference for lifestyle and aspirational brands. The rise in premiumisation is evident
in the higher focus of the big players on semi-premium and premium categories with an increase in product
launches and marketing of these categories.
Increased Alcohol Accessibility and Availability: Over the past few years, there has been a huge change in
attitudes and lifestyle, making consumption of alcohol more socially acceptable. This acceptability of alcohol
extends to drinking in family environments, at social events and by females/youngsters. There has been an
increase in the variety of alcoholic beverages and brands with most of them easily available at government-
licensed outlets, government shops, private licensed retail chains, restaurants, pubs and bars.
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New avenues of online orders and home delivery: Amid the COVID-19 pandemic and to make-up for the
loss of sales with consumers refraining from going for liquor purchases, many state governments have now
allowed home delivery of liquor. Retailers directly deliver liquor to homes and also through agencies like
food aggregators and standard technology platforms. In long run, this may help increase industry revenues
as many consumers, particularly women, are not comfortable going out to buy liquor from shops.
Online liquor sales in India
Source: Company
Improved operating environment: The importance of the liquor industry to the state’s exchequer cannot be
understated. A significantly improved operating environment led by state-wide price hikes and favourable
policy changes resulted in this robust industry performance. Most of the excise policy changes last year have
focused on enhancing state revenues without increasing taxes which bodes well for the organic growth in the
industry.
Regulatory structure
Both central and state governments have certain restrictions on production, movement and sale of spirits in
the country. Licenses are required to produce, bottle, store, distribute or retail all alcoholic beverage products.
Prohibitively high inter-state duties compel national alcoholic beverage players to set-up owned or contract
manufacturing setups in every state. Distribution is also highly controlled, both at wholesale and retail levels.
In addition, direct advertising of alcoholic beverage products is not permitted in India.
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State wise structure and regulations

Market structure Overview Pricing control States
Free / Open market A business may apply for a Company has reasonable Arunachal Pradesh, Assam,
license for a fee defined by the independence over price hikes Goa, Maharashtra, Meghalaya,
state government subject to Tripura, Uttar Pradesh
license availability
Auction market The license for sale of liquor is Company has to negotiate Chandigarh, Haryana, Punjab
auctioned by the Government price increases with state
to the highest bidder on an appointed distributors
annual basis based on an
auction process
State owned/ Government The government is the Strict control on pricing by the Andhra Pradesh, Chhattisgarh,
corporations wholesaler and/or distributor state government Delhi, Jharkhand, Karnataka,
who purchases directly from Kerala, Madhya Pradesh,
a company. Some states also Rajasthan, Tamil Nadu,
have retail shops run by the Telangana, West Bengal
government
Prohibition States where sales of liquor is Not applicable Bihar, Gujarat
prohibited
Source: Company; Sharekhan Research
Additional taxes/levies due to COVID-19
During FY2021, post the COVID-19 outbreak, most of the states experienced lockdown which created stress
in the economy. As a result, there were additional taxes/levies in some states leading to a price increase for
consumers.
Actions taken by states

State Rate hike during COVID-19
Rajasthan 10% increase in excise duty on IMFL
Delhi 70% COVID-19 cess on MRP
Karnataka 11% increase in excise duty
Andhra Pradesh 75% increase in excise duty
Telangana 15% COVID-19 cess on MRP
West Bengal 30% additional sales tax
Odisha 30% COVID-19 cess on MRP
Punjab Additional excise of Rs. 10 per bottle
Tamil Nadu 15% increase in excise duty
Kerala 35% COVID-19 cess on IMFL
Assam & Meghalaya 25% increase in excise duty
Uttar Pradesh Hike of Rs. 5 to Rs. 400 depending upon type and size
Jammu & Kashmir 50% increase in excise duty
Goa 20% increase in excise duty
Source: Industry; Sharekhan Research
Progressive liquor policy in Uttar Pradesh
In 2018, the Uttar Pradesh state government came out with a new policy for sale of liquor in the state. The
policy aimed at hitting the liquor cartels operating in Uttar Pradesh, especially in western UP and curb
rampant liquor smuggling from neighbouring states. Liquor smuggling was quite rampant in western UP
due to a higher excise duty in the state compared to neighbouring states. A new online bidding process for
liquor retail shops was introduced and traders would individually bid for each retail outlet. To encourage
digital payments, liquor retailers would provide facilities for electronic payments through debit/credit cards,
e-wallets, etc. The policy further sought to curb rampant illegal liquor trade and smuggling, which resulted in
excise revenue loss to exchequer.
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According to the 2021-22 policy, UP has made it mandatory to obtain licence to purchase, transport and store
liquor more than prescribed limit of 1.5 litres of each country made foreign liquor and IMFL. The sale of foreign
liquor in 90 ml bottles under the regular category would be permitted. Low-alcohol beverages (LBA) would
now be available at retail shops of foreign-made liquor, model shops, and premium retail vend besides the
beer shops. Renewal of country liquor, foreign liquor, beer, bhang retail shops, and model shops has been
permitted for 2021-22. To promote ease of doing business, brand registration, label approval, bar and micro-
brewery licences will have the option to be renewed up to three years instead of requiring approvals every
year. The new policy also encompasses the total digitalisation of the excise department in 2021-22. Efforts
would be made to computerise all processes and procedures of the excise department under the Integrated
Excise Supply Chain Management System (IESCMS). The provision that no liquor shop shall be opened within
5 kilometres of the border of another district, without the consent of the collectors of both the districts, will be
removed. All these majors will be positive for branded players to increase their sales volumes in the coming
years. With such favourable reforms, UP government is targeting excise revenues of Rs. 50,000 crore from Rs.
32,000 crore in the short span.
Delhi liquor policy, 2021 – following footsteps of UP
The new liquor policy will be implemented from November 17, 2021 and will mark the exit of the Delhi
government from the retail business of liquor. By appointing new retail licensees, the Delhi government is
trying to pave the way for a range of sweeping reforms to boost the city’s revenue, to crack down on the liquor
mafia and improve user experience under the new state excise policy. Under the Delhi Excise Policy, 2021, the
city has been divided into 32 zones and allotment of licenses is now being done on a zonal basis. Those who
have won a zone or two have been given L-7Z or L-7V licences which are meant for retail sale of Indian and
foreign liquor (except country liquor) in Delhi. With the new policy, liquor shops in the capital, will also be able
to offer discounts, enabling festive season offers that are usually seen around Diwali on vehicles, electronics,
and gift items. It also allows home delivery of liquor in the capital through websites and apps.
Rajasthan liquor policy 2021 – transforming from conservative to liberal liquor policy
Rajasthan government has allowed bars to operate microbreweries. The state has also allowed an additional
2,100 urban vendors to sell both IMFL and country liquor, raising the total number of vendors selling both
IMFL and country liquor from 5,600 to 7,700. The new policy also does away with the lottery system for
allotment of liquor shops. In its place, an e-auction system has been introduced.
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Why we like Radico Khaitan

Radico Khaitan Limited (RKL) has transformed itself into a leading Indian Made Foreign Liquor (IMFL) brand player
from just a distillery player with premiumisation at core of its growth strategy. The company has leadership
positioning in categories such as vodka and premium brandy and focusing on improving its positioning in the
whiskey segment through new launches. Premiumisation strategy helped it to become volume growth leader
with IMFL volume growth outpacing industry growth in the past 3-4 years. The contribution of Prestige & Above
(P&A) brands to IMFL sales volumes improved to 30% (50% in value terms). This along with operating efficiencies
aided in OPM improving by 430 bps to 17% in FY2021 and is further expected to enhance by 200 bps to 19% by
FY2024. With no major capex plan going ahead, we expect enhanced cash flows will be utilised for potential
higher dividend payout to shareholders, adding more premium brands to the portfolio and improving growth
prospects of core brands.
Strong product portfolio with premium touch
RKL started its journey of branded products from 1998. Product innovation, catering to consumer aspirations and
identifying gap in the market has been key to RKL’s success over the years. The company has continuously tracked
changing industry dynamics, consumption patterns and consumer preferences to drive its product innovation. It
has launched multiple brands including 8PM Whisky, Old Admiral Brandy, Contessa Rum, etc, with a focus on
improving its presence in key spirits categories in India. The company started its premiumisation journey in 2006
by launching multiple brands (including Magic Moment Vodka), which helped the company to achieve sustainable
revenue growth and consistent improvement in OPM. Further, the company has improved its brand image in the
international market with the launch of super-premium brands such as Rampur Indian Single Malt Whisky and
Jaisalmer Indian Craft Gin. Its strong premium product portfolio, resilient business model and presence across
key markets has aided it to consistently outperform the industry (during pandemic as well). Customer-centric new
product launches, supporting the brands with higher media spends (7-8% of IMFL sales) and improving distribution
would help the company to remain ahead of industry over the next few years.
RKL: Journey to Premiumisation
Before 1998: Bulk supplier & bottler 1998-2006: Volume creation 2006 onwards: Premiumisation
During this phase, the company’s oper- This phase saw RKL move steadily in the Premiumisation started with the launch
ations were concentrated on supplying branded, premium market with the launch of Magic Moments vodka, which became
bulk spirits and as a bottler to other spirit of multiple brands including 8PM Whis- the largest selling vodka in India and one
manufacturers. By 1996, RKL had created ky, Old Admiral Brandy, Contessa Rum, of the largest globally. During this period,
large capabilities and gained expertise to etc. It concentrated on building a strong RKL achieved premium sales volume of
manufacture high quality spirit for branded manufacturing platform, establishing a over 7 Million cases. The Company has
players and armed forces/CSD. robust pan India distribution network and launched twelve new brands over the last
achieved sales volume of over 10 million decade of which eleven have been from
cases. the premium category.
Built strong portfolio of premium brands in last 10 years
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Broad choice for consumers with Premium pricing (Price per 750ml)
Company Whiskey Premium Whiskey Vodka Premium Vodka Brandy Rum
Radico 8pm - 460; Rampur - ~Rs4000 Magic Magic Moments Morpheus - Contessa -
8PM Black - Moments - Verve - 900 1390 550
Rs600-700 800
After dark - 1400 Whytehall - RKL 1965 -
Rs400-500 550
United Spirits McDowells No.1 Black Dog Centenary - Romanov - Smirnoff - 1560 McDowells No. McDowells
- 640 2500 670 1 - 540 No. 1 Rum -
540
Royal Challenge Black Dog Triple Gold - White Mischief Ketel One - 3500 Honey Bee -
- 800 3060 - 730 580
Imperial Blue - Black & White Blenders
670 Scotch - 2650
Pernod Royal Stag - 720 Ballantines - 3075 Fuel - 850 Absolut - 3100
Imperial Blue Chivas Regal - 5600
Superior - 600
Blenders Pride - 100 Pipers Premium
1350 Scotch - 3650
Source: Sharekhan Research
Volume growth leader for past 3-4 years

With more than 60% of India’s market dominated by whiskey category, RKL has taken non-conventional route
of building presence in smaller categories such as rum, vodka and gin by launching premium products in each
category. With higher demand for premium brands, RKL premium portfolio registered faster growth in the
domestic market. The company’s IMFL volume growth stood ahead of industry growth for the past four years
(even during the pandemic year).
Consistently outperforming the industry over the past three years
15.0 12.5
10.8
9.2
10.0
Growth y-o-y (%)
5.0
0.4
0.0
FY19 FY20 FY21
-5.0
-10.0 -8.1
-15.0
-13.6
Industry RKL
Source: Company, Sharekhan Research
Focus on gaining market share

RKL has dominant market positioning in few of its product categories. In the vodka and super premium brandy
categories, the company has leadership positioning with over 60% market share each. In rum category the
company has 30% market share. Magic Moment Vodka Verve has a 20% market share in the premium vodka
category. In whiskey (constituting more than 60% of domestic liquor market), the company has 6% market
share. Overall RKL has 7% market share in the domestic liquor industry. The company has two formidable
brands in whiskey segment - 8PM Whisky and 8PM Premium Black Whisky. The company will be focusing
on enhancing its market share in the whiskey segment by launching 2-3 new products in the coming years.
The company would be focusing on launching these products in the premium (contribution rate is $20 million
a case), which is around 10% of the overall whiskey market. It is also planning to launch one new brand
in the vodka category and a premium brand in the Gin category. With premiumisation at core of strategy
and sustained new product launches the management is confident of achieving 100-150 bps expansion in
the market share over the next two to three years. Further, RKL is aggressively investing behind brands to
improve its visibility amongst the consumer.
October 06, 2021 8

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Market share in key categories

Brands Category Market share (%)
Magic Moment Vodka 60%
Morpheus Super Premium; Whytehall Brandy 60%
Contessa Rum 30%
Magic Moment Verve Premium Vodka 20%
Source: Company
Uttar Pradesh (UP), Karnataka, Andhra Pradesh, Telangana and Tamil Nadu constitute 65% of liquor market
in India. With premium product portfolio, RKL has strong presence across key markets. In UP, the company
has 30% market share. Lesser per capita consumption, progressive liquor policy and introduction of modern
shops/premium shops in the state will help, RKL’s market share to further expand in the state of UP. Delhi has
followed the UP model with some restrictions. Similarly, Punjab and Haryana are also considering transferring
their model in-line with the UP model. This will help RKL to gain market share in some of this states. Further,
the company has strong market share in states such as Maharashtra, Karnataka, Telangana, Andhra Pradesh
and Uttarakhand. In southern states, the company has gained market share by 150-200 bps in last two years.
Region wise revenue split
14%
38%
11%
37%
North South West East
Prestige & above brands contribution improved to 30% of sales volume

Prestige & Above (P&A) brands’ contribution improved to 30% of sales volume (50% of sales value in FY2021)
from 26% in FY2017 (18% in FY2014). Due to improving demographics and changing consumer preferences
to premium products, the demand for premium products has grown consistently in key markets. This along
with higher media spends helped RKL post consistent improvement in P&A sales volume in past few years.
RKL’s P&A sales volume clocked an 11.7% CAGR over FY2015-20 aiding IMFL sales volume to grow at CAGR of
4.5% over the same period. RKL’s P&A sales volumes to United Spirits sales of P&A brands is just 17%, which
provides huge opportunity for RKL to improve its sales in the coming years. With new product launches in
the key categories, P&A sales volume is expected to further improve to 34-35% by FY2024. P&A brands are
expected to post a CAGR of 18% over FY2021-24.
October 06, 2021 9

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P&A contribution to sales volume improve RKL’s P&A sales are 17% of USL P&A sales volume
12.0 35.0 45.0 17.4 17.5 18.0
10.8
34.0 40.0 17.0
10.0 9.4
33.8 33.0 35.0
16.0
7.9 32.0
8.0 7.1 30.0 14.7
32.3 15.0
6.5 31.0
6.1
Mn cases
mn cases
25.0 13.7
6.0 30.0 14.0
%
%
20.0 12.9 12.9 13.0
30.1 29.0 13.0
4.0 29.1 15.0
29.0 28.0
28.3 12.0
10.0
27.0
2.0
5.0 11.0
26.0
0.0 25.0 0.0 10.0
FY19 FY20 FY21 FY22E FY23E FY24E FY15 FY16 FY17 FY18 FY19 FY20 FY21
Volume % contribution USL RKL % of USL sales
Source: Company, Sharekhan Research Source: Company, Sharekhan Research
Focus on increasing global footprint

The sustained focus on creating strong brand portfolio over the past few years is now paying rich dividends
in the international markets. RKL’s brands are available in more than 85 countries. Despite the pandemic and
frequent lockdowns, RKL’s exports registered strong growth during FY2021 and contributed over 7% of the
total net revenue from operations. Due to strong brand equity, RKL’s brands were the preferred ones for home
consumption. Online sales for its luxury portfolio were able to offset non-availability of Global Travel Retail
Channel. RKL successfully launched a new expression of its Indian Single Malt – Rampur Asava in London.
The brand has received encouraging response from global whiskey experts, consumers as well as traders.
Within a short span, Jaisalmer Indian Craft Gin has a global footprint in more than 25 countries.
Revenues to grow at CAGR of 17% over FY2021-24
RKL’s net revenues clocked a 10% CAGR over FY2017-21 affected by roadblocks such as implementation of
GST and pandemic. However, with consumers shifting to premium IMFL brands, RKL’s focus on improving
presence of each brand in key markets and emergence of favourable liquor policies in key states would help
in faster growth of branded liquor products in the near to medium term. Thus we expect RKL’s revenues to grow
at CAGR of 17% over FY2021-24 to Rs. 3,875 crore. The growth will be largely driven by ~13% volume growth
in the IMFL brands over the same period (led by 18% volume growth in P&A brands). Better revenue mix would
lead to blended realisation to grow at CAGR of 4% over the same period.
Increase in sales volume of IMFL brand and blended realisation Trend in IMFL brand revenues
34.0 969 1,000 3,500
3,151
923 32.0 950
32.0 3,000 2,704
879
900
30.0 856 29.1 2,500 2,310
814 850 1,978 1,913
28.0 2,000
mn cases
Rs./case
1,669
Rs. cr
773 26.3 800

26.0 1,500
24.3 750
24.0 1,000
22.3 700
21.6
22.0 650 500
20.0 600 0
FY19 FY20 FY21 FY22E FY23E FY24E FY19 FY20 FY21 FY22E FY23E FY24E
IMFL volume Blended Realisation IMFL Revenue
Inflation in ENA prices would be mitigated by backward integration and premiumisation

Raw material prices remained been benign sequentially in Q1 FY2022. Towards the end of last fiscal, some
inflationary pressure was seen in dry goods such as packing material, but it has remained stable around
those levels in Q1 FY2022. ENA prices remained stable in Q1 FY2022. Given the Centre’s ethanol blending
policy, the company might see some headwinds in the ENA prices, but that should not be significant. Around
65% of the company’s alcohol is manufactured through grain based ENA while 35% is manufactured through
October 06, 2021 10

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molasses based ENA. Inflation in grain prices not expected to be significant as it consumed by common man.
Hence inflation in the ENA prices for RKL is expected to be moderate. Moreover, with the backward integration
into captive ENA production, the company is protected from any significant fluctuations in ENA prices. Further
as the company moves to premiumisation ladder the margins are less susceptible to raw material inflation.
Overall, gross margins are gradually expected to improve in the medium to long term.
Increasing efficiencies through supply chain management
To mitigate supply chain risks emerging from the pandemic, RKL is minimising import from China and other
countries. The company is developing its sourcing base in India to maximise the supply chain efficiency. RKL
has done reverse auction in past in logistics and is currently exploring the possibility in packaging and other
materials to control costs. To enable more efficiency in procurement process, RKL is utilising IT based tools
for full-fledged material requisition planning starting from sales forecast to ordering, inventory management
to cost control and to service market fast. The company is also identifying the key business partners to create
collaborative approach to improve the supply chain in the medium to long term.
Premiumisation & efficient supply chain would help in margin improvement
Premiumisation strategy and operating efficiencies helped OPM to expand by 430 bps to ~17% in FY2021
(contribution of P&A brands to IMFL sales volume improved by 310 bps over the same period). With contribution
of P&A expected to go up to 34% by FY2024 (IMFL brand sales to reach 32 million cases), the OPM is expected
to further improve to 19% by FY2024.
Prestige & above brands have higher margins than regular brands Trend in increase in contribution of P&A brands and OPM
25% 40.0
33.8
35.0 32.3
29.1 30.1
20% 28.3 29.0
30.0
25.0
15%
20.0
%
10% 15.0 18.9

17.1 18.0
16.7 16.9
15.3
10.0
5%
5.0
0% 0.0
Prestige & above brands Regular & other brands FY19 FY20 FY21 FY22E FY23E FY24E
Margins P&A contribution OPM
Better profitability and lower interest cost would aid strong growth in the bottom-line
RKL’s operating profit is expected to clock a CAGR of 21% over FY2021-24. This will be driven by strong
revenue growth and expansion in the margins in the same period. Further the reduction in the debt would lead
to sustained decline in the interest cost by 60-70% by FY2024. Overall PAT is expected to grow at CAGR of
21% over FY2021-24.
Steady rise in operating profit Reduction in the interest cost
800 40
733 35
700 35 32
601
600 30
494
500 25 22
409
372
Rs. cr
Rs. cr
400 350 20
16
300 15 12
200 10 7
100 5
0 0
Operating profit Interest cost
October 06, 2021 11

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Better working capital management and higher cash flows led to debt reduction
Scaling down of volumes in certain states were company was making lower margins and tight on credit norms
coupled with efficient inventory management helped RKL to reduce working capital days from 61 days in
FY2016 to 34 days in FY2021. This aided the company to generate cumulative free cash flow of Rs. 1,144 crore
over FY2017-21. The large chunk of FCF generated was utilised to reduce debt by Rs. 400 crore over the same
period. With higher cash generation, the company is expected to be net cash positive by FY2023.
Company to be net cash positive in FY2023 Improvement in operating cash flows

300 400 365
190 343
200 350
300 272
100 45 258
250
0 203
Rs. cr
FY19 FY20 FY21 FY22E FY23E FY24E 200
Rs. cr
-100 -6
150
-200 -148
100 84
-300
50
-317
-400
0
-389
FY19 FY20 FY21 FY22E FY23E FY24E
-500
Net debt Operating cash flows
Limited capex will pave way for higher investment behind brands and potential higher pay-out
With no major capex plan going ahead, the company is planning to invest large part of cash generated in
creating high margin products, which will help it to improve return ratios at faster pace. We expect RKL’s
return ratios – RoE and RoCE are expected to improve to 17.4% and 22.6% in FY2024 from 15.1% and 17.4% in
FY2021. This brands will be created organically as there are no inorganic opportunities visible in the domestic
market. Further after investing behind brands, the company has decided remaining cash in creating value for
shareholders in the form of potential higher dividend pay-outs or buybacks.
Trend in Dividend per share
8.0 7.5
7.0
6.0
5
5.0
4.0
Rs.
3
3.0 2.4
2
2.0 1.2
1.0
0.0
FY19 FY20 FY21 FY22E FY23E FY24E
DPS
October 06, 2021 12

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Financials in charts
Consistent growth in revenue and PAT Margins to expand from current level
4,500 60.0
3,875
4,000
50.0
3,348
3,500 51.6 50.5 51.0
50.3 50.0
2,883 48.6
3,000 40.0
2,427 2,418
2,500
2,097
Rs. cr
30.0
%
2,000
18.0 18.9
16.7 16.9 17.1
1,500 20.0 15.3
1,000
391 490 10.0
500 252 271 311 12.6
188 10.4 11.2 10.8 11.7
9.0
- -
Revenue PAT GPM OPM NPM
Return ratios to improve Consistent working capital cycle

24.0 22.9 45
39 39
40
22.0 20.7 34
35 32 32 31
20.0 18.5
18.1 30
17.4
18.0 25
16.2
Days
%
17.6 20
16.0
16.3 16.4
15
14.0 15.1 15.1
14.1 10
12.0
5
10.0 0
ROE ROCE Working Capital days
Debt position to improve Significant free cash flow generation

450 0.3 900
408
792
400 0.3 800 726
0.3
334 0.3
350 700
610
300 278 0.2 600
498
250 219 500 428
Rs. cr
Rs. cr
0.2
x
200 0.2 400 326

144
150 0.1 300
0.1
100 69 200
0.1
50 0.1 100
- 0.0 - -
Total Debt D/E Free cash flow
October 06, 2021 13

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Company overview
Radico Khaitan Limited (RKL), formerly known as Rampur Distillery, is one of the oldest and the largest
manufacturers of IMFL in India. RKL commenced its operations in 1943 and over the years has evolved from
being just a distiller of spirits for others to a leading IMFL company. In 1998, the company started its own label
- after supplying bulk spirits and bottling services to other spirit manufacturers for over five decades - with
the introduction of 8PM Whisky. Over the years, RKL’s focus on innovation, R&D strength and understanding
of customer preferences has helped the company to develop its entire brand portfolio organically, with in-
house capabilities. At present, the company’s brand portfolio across the IMFL categories of Whiskey, Brandy,
Rum and white spirits includes Rampur Indian Single Malt Whisky, Magic Moments and Magic Moments Verve
Vodka, Morpheus Premium and Morpheus Blue Brandy, 8 PM and 8 PM Premium Black Whisky, Contessa Rum,
Old Admiral Brandy, etc. Currently, the company has five millionaire brands, which are 8 PM Whisky, 8PM
Premium Black Whisky, Contessa Rum, Old Admiral Brandy and Magic Moments Vodka.
Product launch timelines
Source: Company; Sharekhan research
5 brands entered Milloinare club

12
10
10
8
million cases
6
4.5
4
2 1.5 1.2
1
0
8PM whisky Magic Moment Vodka Contessa Rum Old Admiral Brandy 8PM Black whisky
Sales volumes
Source: Company; Sharekhan research
RKL is also one of the largest providers of branded IMFL to the Canteen Stores Department (CSD). There
are stringent conditions for entering into CSD segment leading to high entry barriers for new players. The
company has been successfully building its brand equity in international markets and currently exports its
products to more than 85 countries. The company has been able to establish a niche position for itself in the
global spirits market. RKL’s exports registered strong growth during FY2021 and contributed over 7% of the
total net revenue from operations.
October 06, 2021 14

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Global presence
Source: Company;
Pan India Manufacturing units and Significant Distillation Capacity

RKL has three distilleries in Rampur (Uttar Pradesh) and two in joint venture RNV in Aurangabad (Maharashtra) in
which RKL owns a 36% equity. The company operates five owned and 28 contract bottling units spread across
the country with a combined capacity of 160 million litres. Its strategically located manufacturing facilities
and distribution centres at various locations provide easy access to key markets. Apart from a nationwide
presence, strategic location also helps to avoid the high taxes levied on interstate movement of finished and
in-process liquor.
Distribution of manufacturing units
Source: Company;
October 06, 2021 15

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Distilleries and their capacities

Number of Capacity (million litres)
Location distilleries Molasses Grain Malt Total
Rampur, UP 3 75.0 27.0 7.5 109.5
Aurangabad, Maharashtra 2 40.0 15.0 - 55.0
Total 5 115.0 42.0 7.5 164.5
Strong distribution network

RKL has a strong sales and distribution network with a presence in retail and on-trade through more than
75,000 retail and 8,000 on-premise outlets in different parts of India. Apart from wholesalers, a total of ~300
employees divided into four zones, each headed by a regional profit centre head, ensure an adequate on-
the-ground sales and distribution network across the country. The robust distribution system enables the
company to ensure availability of products across channels and geographies.
Senior management having thorough industry knowledge

Key executive Position Background
Dr. Lalit Khaitan MD & Chairman • Has over 50 years of industry experience
• He has been instrumental in improving quality standards and enhancing
customer satisfaction
• He has been associated with a number of developmental projects, has
represented India with several international delegations, and is involved in
social & educational activities across India.
Abhishek Khaitan MD • Has over 25 years of industry experience
• He holds a Bachelor degree of Engineering from BMS college of Engineer-
ing, Bangalore and has completed a Managerial Finance & Accounting
course from Harvard, USA.
• Started IMFL division and has played an instrumental role in the brand cre-
ation journey of the company
Amar Sinha COO • Has over 33 years of experience of heading reputable Indian and multina-
tional FMCG companies and in the field of sales & marketing
• Prior to joining the company in April 2017, he was the Executive Director at
Wave Industries
Dilip K Banthiya CFO • Has over 35 years of in corporate finance, treasury, international finance
and corporate mergers and acquisitions
• Has been associated with various professional bodies and committees
K P Singh Director – Production • Has over 45 years of industry experience and has been with the company
for over three decades
Sanjeev Banga President – International • Has over 30 years of industry experience
business • Joined the company in 2008, previously worked with Seagram India, Nestle
India, Kohinoor Foods, Mason and Summers Alcobev, and Godfrey Phillips
India
October 06, 2021 16

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Leading through innovation & brand building

Vodka
Market share for vodka in value terms in India is much lower than the global industry. This provides huge opportunity for
growth in the vodka category.
Market share of various categories
100
77
80
60
40 35
28
23
20 14
9 8 5
0 1
0
Whiskey Brandy Rum Vodka Others
India Global
RKL’s Magic Moments family of vodka leads the Indian vodka industry with over 60% market share. Changing consumption
patterns and consumer preference represent significant growth opportunity for already a market leader.
Journey of building the Vodka portfolio
Brandy
Morpheus is India’s largest selling premium brandy and leads the super-premium brandy segment with 56% market
share in India. Its goblet packaging and brand positioning have helped create a niche. After the success of Morpheus, the
company launched Morpheus Super Premium Brandy in 2018.
Growth in Morpheus volume

1
0.8
0.6
mn cases
0.4
0.2
0
FY2010 FY2012 FY2014 FY2016 FY2018 FY2020
Volume
October 06, 2021 17

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Whiskey
8 PM Premium Black Whisky has established its mark within a short span after its launch. Derived from the ancient Indian
knowledge of herbs; retaining the classic gin flavour of juniper berries, a refreshing twist has been added with hand-
picked Indian botanicals. Of the 11 botanicals used in the distillation, 7 have been sourced from all four corners of India.
Volume growth of 8PM Premium Black Whisky
0.90
0.80
0.70
0.60
mn cases
0.50
0.40
0.30
0.20
0.10
0.00
FY2019 FY2020
Rewards & recognitions achieved
ESG corner - steps towards sustainable future

Use of recycled glass bottles Energy Consumption
Glass bottles are used on a large scale in RKL. The com- In FY2021, out of the total power consumption at the Rampur plant, RKL
pany’s continuous efforts to increase consumption of re- generated 71% through captive power plants using renewable energy/
cycled glass bottles has led to improvement in recycled bio fuels. A significant portion of the power generation comes from
glass bottle usage from 4.5% in FY2019 to 14.1% in FY2021 biogas generated through waste produced during the alcohol manufac-
turing process – significantly reducing carbon footprint
Water Consumption Water recharging
RKL has been continuously working to bring down the RKL has taken various steps for rainwater harvesting and ground level
water consumption through technology upgrade through- recharging. Currently, RKL is able to recharge ~300% of total water it
out the manufacturing process. As a result, RKL’s water draws from the ground, giving back more to the ecosystem. This has
consumption is one of the lowest in the Alcobev industry. been achieved by installing 129 recharging structures across 38 vil-
Today both, the molasses and grain distilleries, use about lages in Chamraua Block of District Rampur. Consequently, the ground
6.2-6.3 litres of water per bulk litres of alcohol produc- water level in Chamraua Block has improved by about 1 meter and
tion. This has come down by 48% in case of Molasses reached a stable level.
based distillery and 40% in case of Grain based distillery.
Tree Plantation
In FY2021, RKL undertook plantation of 10,000 trees at various locations in the Rampur district.
October 06, 2021 18

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Valuation - Discounted valuation and strong growth prospects with improving cash flows makes it a good pick
RKL currently trades at 30.9x/24.7x its FY2023/24 EPS, which is at ~50% discount to USL valuation. Improved
quality of earnings, higher free cash generation and strong return profile will reduce valuation gap in the
coming years.
n Sector outlook – Liberal state policies and changing consumer preference to drive growth
IMFL sales volumes in India witnessed a significant dip of 18% to 274 million cases due to COVID-19 induced
lockdowns during the early part of the year. By Q4FY2021, eight out of eleven top liquor consuming states
had returned to above pre-COVID levels. Demand for premium brands is relatively less impacted by the
industry slowdown due to COVID-19. Consumers are having more disposable incomes which they can use to
have quality experience at home. Therefore, premium brands are likely to show much more resilience and
grow in the near future. India has an incredibly large young demography which presents many opportunities
to firms in the industry. As the youth approach the legal drinking age and become more affluent, they are
likely to drive much of the expected and projected future demand. Further, some of the key states are coming
out with more liberal policies to drive its respective excise revenue, which will help brand players to scale up
its revenues in those states.
n Company outlook – Premiumisation would lead to strong earnings growth
With consumers shifting to premium IMFL brands, RKL’s focus on improving presence of each brand in key
markets and emergence of favourable liquor policies in key states would help in faster growth branded liquor
products in the near to medium term. Thus, we expect RKL’s revenues to grow at CAGR of 17% over FY2021-24
to Rs. 3,875 crore. With contribution of P&A brands expected to go up to 34% by FY2024 (IMFL brand sales
to reach 32mn cases), the OPM is expected to further improve to 19% by FY2024. RKL’s operating profit is
expected to grow at CAGR of 22% over FY2021-24.
n Valuation – Initiate coverage with Buy assigning a price target of Rs. 1,250
RKL will be one of the key beneficiaries of improving Indian demographics, consumer preference to premium
brands and reviving liquor policies in various states. This along with deleverage balance sheet, the company
is well-poised to achieve strong revenue and earnings CAGR of 17% and 22% over FY2021-24. The stock is
trading at 30.9x/24.7x its FY2023/24E EPS, which is at ~50% discount to United Spirits Ltd (USL) valuations.
Improved quality of earnings, higher free cash generation and a strong return profile will reduce valuation
gap in the coming years. We initiate coverage on the stock with a Buy recommendation assigning price target
of Rs. 1250 (valuing at 34x its FY2024E EPS).
One-year forward P/E (x) band
1200.0
1100.0 40X
1000.0
35X
900.0
800.0 30X
700.0
25X
600.0
20X
500.0
400.0
300.0
200.0
100.0
0.0
Sep-14
Mar-14
Oct-15
Oct-16
Oct-17
Oct-18
Oct-19
Oct-20
Oct-21
Apr-15
Apr-16
Apr-17
Apr-18
Apr-19
Apr-20
Apr-21
October 06, 2021 19

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Valuation GAP between USL and RKL to reduce

120.0
100.0
One year forward PE (x)
80.0
60.0
40.0
20.0
0.0
Sep-17
Sep-18
Jan-18
Sep-19
Jan-19
Sep-20
Jan-20
Sep-21
Jan-21
Mar-17
Mar-18
Mar-19
Mar-20
Mar-21
Jul-17
Jul-18
Jul-19
Jul-20
Jul-21
May-17
May-18
Nov-17
May-19
Nov-18
May-20
Nov-19
May-21
Nov-20
USL PE (x) RKL PE (x)
One-year forward EV/EBIDTA (x) band

1200.0
1100.0
1000.0 25x
900.0
800.0 20x
700.0
600.0 15x
500.0
400.0 10x
300.0
200.0
100.0
0.0
Sep-15
Jan-16
Feb-20
Jan-19
Mar-14
Mar-17
Mar-21
Dec-14
Jun-16
Jun-20
Aug-14
Jul-17
Aug-18
Oct-16
Aug-21
Oct-19
May-15
Apr-18
Nov-17
May-19
Nov-20
Peer Comparison
P/E (x) EV/EBIDTA (x) RoCE (%)
Particulars
FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E
United Spirits 137.9 79.5 60.4 65.5 48.0 38.4 16.8 22.1 24.8
Globus Spirits 29.3 20.3 15.2 16.5 12.1 9.3 26.8 31.6 32.9
Radico Khaitan 43.6 38.9 30.9 29.7 24.2 19.8 17.4 18.5 20.7
Source: Consensus estimates; Sharekhan estimates
October 06, 2021 20

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Financials (Consolidated)
Statement of Profit and Loss Rs cr

Particulars FY2020 FY2021 FY2022E FY2023E FY2024E
Gross Sales 9,417.9 10,367.4 12,533.4 15,217.0 18,453.6
Excise Duty 6,990.9 7,949.2 9,650.7 11,869.2 14,578.4
Net Sales 2,427.0 2,418.1 2,882.7 3,347.7 3,875.3
y-o-y % 15.7 -0.4 19.2 16.1 15.8
Raw Material Cost 1,248.2 1,202.4 1,441.3 1,657.1 1,898.9
Employee Cost 186.1 176.3 197.5 227.1 261.2
Other Expenses 621.0 630.4 749.5 862.0 982.4
Total Operating Cost 2,055.2 2,009.2 2,388.3 2,746.3 3,142.4
Operating Profit 371.8 408.9 494.3 601.4 732.8
y-o-y % 6.1 10.0 20.9 21.7 21.8
OPM % 15.3 16.9 17.1 18.0 18.9
Interest & Other Financial Cost 31.6 22.0 16.2 11.8 6.9
Depreciation 52.5 53.9 57.9 60.7 63.4
Profit Before Tax 296.9 353.1 420.3 528.9 662.4
y-o-y % 3.9 18.9 19.0 25.9 25.2
Tax Expense 45.2 82.5 109.3 137.5 172.2
Adjusted PAT 251.7 270.6 311.0 391.4 490.2
y-o-y % 33.8 7.5 14.9 25.9 25.2
NPM % 10.4 11.2 10.8 11.7 12.6
Minority Interest 1.6 6.6 0.0 0.0 0.0
Exceptional Items -24.2 0.0 0.0 0.0 0.0
Reported PAT 229.1 277.2 311.0 391.4 490.2
y-o-y % 18.0 21.0 12.2 25.9 25.2
Source: Company; Sharekhan estimates
October 06, 2021 21

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Balance Sheet Rs cr
Sources of Funds
Equity Capital 26.7 26.7 26.7 26.7 26.7
Reserves & Surplus 1,516.2 1,766.2 2,037.1 2,361.8 2,751.8
Net Worth 1,542.9 1,792.9 2,063.8 2,388.5 2,778.5
Other liabilities
Deferred Tax Liabilities (Net) 78.5 80.2 80.2 80.2 80.2
Total Borrowings 407.7 278.0 219.2 144.2 69.2
Capital Employed 2,029.1 2,151.2 2,363.3 2,612.9 2,928.0
Application of Funds
Net Block 729.5 778.4 770.5 759.8 746.3
Capital WIP 18.1 37.8 20.0 50.0 50.0
Goodwill on consolidation 13.9 11.5 11.5 11.5 11.5
Investment 299.2 262.0 319.6 383.5 454.5
Current Assets 1,422.1 1,624.7 1,947.1 2,262.6 2,700.6

Inventories 374.2 489.1 533.3 646.2 784.1
Sundry Debtors 823.1 697.5 815.6 988.4 1,153.1
Cash and Bank Balance 10.1 121.1 202.9 173.0 238.9
Fixed Deposits with Bank 8.1 8.9 10.0 12.0 15.0
Loans & Advances 61.2 74.7 93.4 107.4 123.5
Other Current Assets 145.3 233.5 291.9 335.7 386.0
Less: Current Liab. & Provisions 453.7 563.2 705.3 854.5 1,035.0
Trade Payables 264.2 261.9 345.1 418.2 507.4
Other Current Liabilities & Provisions 189.5 301.3 360.3 436.3 527.6
Net Current Assets 968.4 1,061.5 1,241.7 1,408.1 1,665.6
Net Assets 2,029.1 2,151.2 2,363.3 2,612.9 2,928.0

Cash Flow Statement Rs cr

Cash flow from operating activities 84.5 343.0 271.6 257.8 365.1
Cash flow from investing activities -86.0 -83.5 -91.0 -145.9 -124.0
Cash flow from financing activities 3.4 -148.5 -98.9 -141.8 -175.2
Net change in cash and cash equivalents 1.9 111.0 81.8 -29.9 65.9
Opening cash balance 8.3 10.1 121.1 202.9 173.0
Closing cash balance 10.1 121.1 202.9 173.0 238.9
Free cash flows 610.1 428.4 498.4 726.4 792.2
October 06, 2021 22

Index
Stock Idea
Key Ratios
Margins & tax rates (%)
GPM 48.6 50.3 50.0 50.5 51.0
OPM 15.3 16.9 17.1 18.0 18.9
NPM 10.4 11.2 10.8 11.7 12.6
Tax rate 15.2 23.4 26.0 26.0 26.0
Cost matrix (% of revenues)

Raw material cost 51.4 49.7 50.0 49.5 49.0
Employee Cost 7.7 7.3 6.9 6.8 6.7
Other Expenses 25.6 26.1 26.0 25.8 25.4
Total Operating Cost 84.7 83.1 82.9 82.0 81.1
Growth ratios (y-o-y %)

Revenue 15.7 -0.4 19.2 16.1 15.8
Operating profit 6.1 10.0 20.9 21.7 21.8
PBT 3.9 18.9 19.0 25.9 25.2
Adjusted PAT 33.8 7.5 14.9 25.9 25.2
Reported PAT 18.0 21.0 12.2 25.9 25.2
Per share (Rs.)

CMP 905.0 905.0 905.0 905.0 905.0
Adjusted EPS 19.0 20.8 23.3 29.3 36.7
Cash EPS 22.8 24.3 27.6 33.8 41.5
Book value (BVPS) 115.5 134.2 154.5 178.8 208.0
DPS 2.0 2.4 3.0 5.0 7.5
Valuation ratios (x)

P/E 47.7 43.6 38.9 30.9 24.7
Price / Book value (BV) 7.8 6.7 5.9 5.1 4.4
EV / EBIDTA 33.2 29.7 24.3 19.8 16.1
EV / Sales 5.1 5.0 4.2 3.6 3.0
Market cap / Sales 5.0 5.0 4.2 3.6 3.1
Working capital (Days)

Inventory 15.6 18.0 17.0 17.0 17.0
Debtors 34.4 25.7 26.0 26.0 25.0
Creditors 11.0 9.7 11.0 11.0 11.0
Operating cash cycle 39.0 34.1 32.0 32.0 31.0
Financial ratios
Fixed asset turnover ratio (x) 3.3 3.0 3.5 4.1 4.8
Total asset turnover ratio (x) 1.0 0.9 1.0 1.0 1.0
Operating cash flow/EBIDTA (%) 22.7 83.9 54.9 42.9 49.8
Dividend Payout Ratio (%) 12.7 11.6 12.9 17.1 20.4
Debt / Equity (x) 0.3 0.2 0.1 0.1 0.0
RoE (%) 16.3 15.1 15.1 16.4 17.6
RoCE (%) 16.2 17.4 18.5 20.7 22.9
October 06, 2021 23

Index
Stock Idea
About company
Radico Khaitan Limited (RKL), formerly known as Rampur Distillery, commenced its operations in 1943 and over the
years has evolved from being just a distiller of spirits for others to a leading IMFL company. The company’s brand
portfolio spans Whiskey, Brandy, Rum and white spirits include Rampur Indian Single Malt Whisky, Magic Moments and
Magic Moments Verve Vodka, Morpheus Premium and Morpheus Blue Brandy, 8 PM and 8 PM Premium Black Whisky,
Contessa Rum, Old Admiral Brandy, among others. Currently, the company has five millionaire brands which are 8 PM
Whisky, 8PM Premium Black Whisky, Contessa Rum, Old Admiral Brandy and Magic Moments Vodka. RKL has three
distilleries in Rampur (Uttar Pradesh) and two in joint venture RNV in Aurangabad (Maharashtra) in which RKL owns
36% equity. The company operates 5 own and 28 contract bottling units spread across the country with a combined
capacity of 160 million litres. RKL is one of the largest providers of branded IMFL to the Canteen Stores Department
(CSD) and also exports its products to more than 85 countries.
Investment Argument
RKL has transformed itself into a leading IMFL brand player from just a distillery player with premiumisation at core of its
growth strategy. Its prestige and above brands grew at CAGR of 16% over FY2017-21 contributing to 30% to sales volume
IMFL (50% to sales value) helping operating margins to improve by 430 bps to 17% in FY2021. Increased preference for
premium products aided, the company to post double digit volume ahead of industry growth over FY2017-20. Efficient
working capital management and improved profitability would help, the company to generate high free cash flows in
the coming years. With no major capex on books higher cash generated will be utilised for developing more premium
brands and higher pay-outs to shareholders. We expect RoE/RoCE of the company to improve to 17.4%/22.6% from
15.1%/17.4% in FY2021.
Key Risks
Decline in demand for the company’s products: The slowdown in global economic growth and other declines
or disruptions in the Indian economy in general may result in a reduction in disposable income of consumers and
slowdown in the IMFL industry. This could adversely affect the company’s business and financial performance.
Risk due to stringent regulation norms: The Indian spirit industry is highly regulated and complex as each state
has its own regulations governing the manufacture and sale of spirits. Any change in rules and regulations by the
respective state governments and noncompliance with laws and regulations could adversely impact the business.
Increase in raw material prices: ENA and packaging materials are the two key components of the raw materials.
Any price volatility in the price of these components may have a bearing on the company’s profitability.
Additional Data
Key management personnel
Dr. Lalit Khaitan MD & Chairman
Abhishek Khaitan MD
Amar Sinha COO
Dilip K Banthiya CFO
Dinesh Kumar Gupta Company Secretary
Source: Company Website
Top 10 shareholders
Sr. No. Holder Name Holding (%)
1 TIMF Holdings 5.82
2 HDFC Asset Management Co Ltd 3.26
3 Nippon Life India Asset Management Ltd 3.23
4 Aditya Birla Sun Life Asset Management Co Ltd 2.90
5 Tata Asset Management Ltd 2.83
6 DSP Investment Managers Pvt Ltd 1.90
7 Vanguard Group Inc 1.86
8 Massachusetts Institute of Technology 1.70
9 IDFC Sterling Pvt 1.59
10 IDFC Mutual Fund 1.58
Source: Bloomberg
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.
October 06, 2021 24

Index
Stock Idea
Understanding the Sharekhan 3R Matrix

Right Sector
Positive Strong industry fundamentals (favorable demand-supply scenario, consistent
industry growth), increasing investments, higher entry barrier, and favorable
government policies
Neutral Stagnancy in the industry growth due to macro factors and lower incremental
investments by Government/private companies
Negative Unable to recover from low in the stable economic environment, adverse
government policies affecting the business fundamentals and global challenges
(currency headwinds and unfavorable policies implemented by global industrial
institutions) and any significant increase in commodity prices affecting profitability.
Right Quality
Positive Sector leader, Strong management bandwidth, Strong financial track-record,
Healthy Balance sheet/cash flows, differentiated product/service portfolio and
Good corporate governance.
Neutral Macro slowdown affecting near term growth profile, Untoward events such as
natural calamities resulting in near term uncertainty, Company specific events
such as factory shutdown, lack of positive triggers/events in near term, raw
material price movement turning unfavourable
Negative Weakening growth trend led by led by external/internal factors, reshuffling of
key management personal, questionable corporate governance, high commodity
prices/weak realisation environment resulting in margin pressure and detoriating
balance sheet
Right Valuation
Positive Strong earnings growth expectation and improving return ratios but valuations
are trading at discount to industry leaders/historical average multiples, Expansion
in valuation multiple due to expected outperformance amongst its peers and
Industry up-cycle with conducive business environment.
Neutral Trading at par to historical valuations and having limited scope of expansion in
valuation multiples.
Negative Trading at premium valuations but earnings outlook are weak; Emergence of
roadblocks such as corporate governance issue, adverse government policies
and bleak global macro environment etc warranting for lower than historical
valuation multiple.
October 06, 2021 25

Index
Know more about our products and services
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Stock Idea

Sector: Consumer Goods October 06, 2021

Radico Khaitan Ltd

Add some magic to your portfolio

Powered by Sharekhan’s 3R Research Philosophy

October 06, 2021 ii

3R Research Positioning Summary Valuation and return potential

October 06, 2021 iii

Table of Contents Pages

Right Quality - why we like RKL ........................................................................................................................... 7

Financials in charts ................................................................................................................................................... 13

Company overview .................................................................................................................................................... 14

Key financials .............................................................................................................................................................. 21

RKL snapshot .............................................................................................................................................................. 24

3R Philosophy definitions ....................................................................................................................................... 25

October 06, 2021 iv

Why we like liquor industry

Source: Industry, Sharekhan Research Source: Industry, Sharekhan Research

Category-wise volume growth… …and revenue growth

Source: Industry, Sharekhan Research Source: Industry, Sharekhan Research

October 06, 2021 1

Source: Industry, Sharekhan Research Source: Industry, Sharekhan Research

Growth drivers for Indian liquor industry

A wider drinking age population

Source: Industry, Sharekhan Research

October 06, 2021 2

Source: Industry, Sharekhan Research

Per capita (15+ years) alcohol consumption (2014)

October 06, 2021 3

Online liquor sales in India

October 06, 2021 4

State wise structure and regulations

Additional taxes/levies due to COVID-19

Actions taken by states

Progressive liquor policy in Uttar Pradesh

October 06, 2021 5

Delhi liquor policy, 2021 – following footsteps of UP

October 06, 2021 6

Why we like Radico Khaitan

Built strong portfolio of premium brands in last 10 years

Source: Company; Sharekhan Research

October 06, 2021 7

Volume growth leader for past 3-4 years

Consistently outperforming the industry over the past three years

Source: Company, Sharekhan Research

Focus on gaining market share

October 06, 2021 8

Market share in key categories

North South West East

Source: Company, Sharekhan Research

Prestige & above brands contribution improved to 30% of sales volume

October 06, 2021 9

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

Focus on increasing global footprint

773 26.3 800

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

Inflation in ENA prices would be mitigated by backward integration and premiumisation

October 06, 2021 10

10% 15.0 18.9

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

October 06, 2021 11

Company to be net cash positive in FY2023 Improvement in operating cash flows